Investing in or Acquiring a Medical Provider? Costs of Improperly Reporting Medicare Changes in Ownership (CHOW)

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When an investor desires to invest in or acquire a medical provider, the investor must understand how the transaction may affect the provider’s Medicare enrollment. Depending on the structure of the transaction, the provider must report certain changes in the provider’s ownership to the Centers for Medicare & Medicaid Services (“CMS”). Compliance with CMS’s notification requirements permits the provider to continue participating in the Medicare program under its provider agreement with minimal, if any, delays or issues. However, if the current and new owners do not properly report a change in ownership, they may experience delays in receiving Medicare payments, penalties, or deactivation of the provider’s Medicare billing number, which can lead to significant financial losses.

A provider must notify CMS when a change in ownership (“CHOW”) occurs. If the provider is organized as a partnership under state law, a CHOW occurs whenever a partner is removed, added, or substituted, unless applicable state law permits the partners to agree otherwise. If the provider is organized as a corporation under state law, then a merger of the provider into another corporation, or the consolidation of the provider with one or more other entities constitutes a CHOW. On the other hand, a transfer of stock in the provider and the merger of another entity into the provider (with the provider as the surviving entity) do not qualify as CHOW. While limited liability companies (“LLCs”) have features of both partnerships and corporations, CMS often treats LLCs similar to corporations under the CHOW regulations. As a result, a transfer of a membership interest in a provider organized as an LLC under state law does not qualify as a CHOW. In addition, a provider’s transfer of its assets another entity qualifies as a CHOW. If a transaction qualifies as a CHOW, the current and new owners must submit a CMS Form 855A and other documentation to CMS for approval prior to the CHOW. Even if a transaction does not trigger the CHOW notification requirements, the change in ownership must be reported to CMS as a change in the provider’s Medicare information within 90 days.

Following approval of the CHOW, the provider’s provider agreement with CMS will be automatically assigned to the new owner, unless the new owner rejects assignment in its Form 855 filings. If the provider agreement is assigned, then the new owner will be subject to the terms and conditions of the provider agreement and will be liable for Medicare sanctions and penalties under the agreement. The new owner will begin to receive payments once CMS approves assignment of the provider agreement. On the other hand, if the agreement is rejected by the new owner, it will not receive Medicare payments for services provided after the agreement is rejected. The new owner may apply for participation in the Medicare program, although the provider will be unable to bill and receive payment for services provided during the period in which it is not registered for the Medicare program.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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